Scranton, Pa.'s City Council on Thursday night approved a revised financial recovery plan, which opens the door to a $2.3 million bridge loan and grant from the state.
Shortly before the meeting, Mayor Chris Doherty and council President Janet Evans said the city had obtained a $6.2 million tax-anticipation note at a 5% interest rate from Amalgamated Bank of New York, which Doherty said would enable the city to keep paying past-due bills and payroll.
Officials hope the approval of the three-year recovery plan will win back the good graces of the capital markets. The plan calls for commuter, sales and amusement taxes, and more payments in lieu of taxes from nonprofit organizations.
"Throughout the next three years, everyone needs to work together to realize all the goals of the recovery plan," Evans said.
If they remain cut off from mainstream borrowing, Scranton officials may tap hedge funds for a loan to cover an $18 million deficit.
The state Department of Community and Economic Development, which oversees distressed communities in Pennsylvania under the Act 47 program, has offered an interest-free $2 million loan and a $250,000 grant if the council can pass a plan.
Scranton's plan coordinator, the Pennsylvania Economy League, must also sign off on the plan. PEL and the council have differed on some revenue projections.
The city must still submit baseline revenue projections acceptable to DCED and PEL by Dec. 1.
The council two months ago, unhappy with the leadership of the Scranton Parking Authority, let the authority default on a $1 million bond payment. The city is the guarantor of those bonds. According to Doherty, M&T Bank of Buffalo then withdrew its backing for an $18 million loan the city needs to cover payroll and pay overdue bills.
Gary Lewis, a private-sector financial consultant and downtown resident, questioned whether the Tans will merely cover debt service, and whether Pennsylvania law would allow that.
"I don't think you can use debt to pay debt service. It has to be for operating expenses or capital projects," Lewis said Thursday night. He called the city's plan "theoretically arrogant and reckless."
Workout professionals and legal analysts, meanwhile, said there is scant precedent for a municipality seeking a hedge-fund loan.
"The short answer is no," said Bill Brandt, president of restructuring firm Development Specialists Inc. and also the chairman of the Illinois Finance Authority.
Brandt said Scranton can expect tougher terms should it borrow through a hedge fund.
"There is nothing intrinsically wrong with hedge funds. In many ways, they are lenders of last resorts," Brandt added. "They would probably want a deal with collateral, should the matter go south, which is not out of the question in Scranton, given its history."
Brandt said Scranton's wounds are self-inflicted. "They let the [Parking Authority] default on its debt, then acted like it's no big deal. It's like a consumer who defaults on a credit card, then goes into a store and wonders why he can't buy anything."
Anthony Sabino, a business professor at St. John's University, also warned about wading into unknown waters.
"A hedge fund is a lender by any other name. Obviously they're not loan sharks, but that said, hedge funds are different sorts of animals. They are more aggressive in the bargains that they drive," he said.
"With all due respect to the city fathers in Scranton, I see more than a speck of desperation here. If I'm on the outside looking in, I say 'Whoa!' " Sabino added.
